Michael Covel trend following videos

I have a lot of time for this guy's approach as outlined in this and a couple of other videos on youtube. I believe that he has written books but I haven't read them.

When it comes to data the only data that I can really trust and understand is the close price and the volume. Fundamental data cannot be trusted in the same way. It can be fiddled or made to look better than it really is. I am not an accountant, although I am not totally ignorant to their methods. But I know my limitations when it comes to understanding a company and it's fundamentals.

If I was buying a company on fundamentals I would want to kick the tyres, talk to key staff, and delve into basic industry characteristics. I would want to independently value assets and look at the past financial records. I would want to understand anything that might impact on the company going forward. Then I could, with the aid of industry experts that would need to be working for me, make a decision on the value of a business.

But with listed companies I can't easily do this without substantial resources.

Using trading systems I can bypass most or all of the fundamental information. A publicly listed company is valued everyday by the "market".

Trend following, combined with exit strategies and position sizing, relies on price and volume data.

Don't look back!

Whatever you do don't look back - always look to the next trade, or the next 1000 trades.

I sold CBH at 63.5 - 64 cents just after the open on Monday. The exit only just triggered, 0.5 cents higher and I wouldn't get the exit. Another trader I know spoke to me after the close; "did you see CBH. It closed at 71 cents!"

Since I trade a weekly system my rules allow me to sell anytime I like in the week, although my strong preference is to get out early. So if I had held them another day I might have made substantially more money. My super fund bought in at 46 cents for a return of around 38%.

I have a rule - once the trade is done I remove the stock from my watch-list and put the chart in the completed trades list. I don't follow the stock after I sell it.

I told him it's past history. It doesn't matter what CBH closed at if I am not holding them. Just move on, make the next trade and don't look back. There are other trades and other opportunities. If I delay the trade next time hoping for a better exit it is just as likely to go against me.

Smart Money in trading

 
These charts show a couple of trades I took (one was in my super fund) late last year some week's prior to takeover offers being announced. Was it the smart money buying that triggered the buys or was it public information that triggered the price and volume information? Or was it something altogether different.

In the case of FLT it is possible that the stock had bottomed out. I am not sure what the fundamentals were saying (if you can trust them) but I suspect they were painting a turnaround story - things were looking rosier in the future. Not a bad reason to launch a takeover!

On a side issue I used PlotText to put the close price on the chart as well as CloudCharts to plot a breakout band.

Stevo

Stochastic on price chart

The monthly chart above shows my adaptation of the stochastic plotted on the price chart.

The code I am using is as follows;

Sp = Param("stoch Period", 2, 1, 55, 1);
Lv = MA(LLV(L,Sp), 3); Hv = MA(HHV(H,Sp), 3);
midpoint = Lv+(Hv-Lv)/2;

I am not saying that it is perfect, but it gives the general idea.

The stochastic uses some averaging for the actual indicator. On the price chart the close price can go above and below the 0% / 100% lines because it isn't averaged. The price becomes the indicator!


 

Money in the Market

 The chart above shows the portfolio position at the start of each month over the last year. The black line shows a cumulative average of the total cost of shares bought. Over the last 2 years I have had an average of $455,000 in the market based on the start of each month.

The dollars committed to the market have been relatively steady. I can use this average as a base for calculating a % return on realised trades. This method shows 31% for 2005, 21% for 2006 and (on unrealised or carried forward profits) 44% for 2007.

If I take the total dollars profit (realised and unrealised) for 2006 I would be up 65% at the end of 2006. But I don't think I should include open trade profits in the performance results.

Stevo